CHAPTER 7TRADE POLICIES FOR THE DEVELOPING NATIONS

MULTIPLE CHOICE

1.Which of the following is not a major factor that encourages developing nations to form international commodity agreements?a.Inelastic commodity supply schedulesb.Inelastic commodity demand schedulesc.Export markets that tend to be unstabled.Secular increases in their terms of trade

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2.International commodity agreements do not:a.Consist of consuming and producing nations who desire market stabilityb.Levy export cutbacks so as to offset rising commodity pricesc.Utilize buffer stocks to generate commodity price stabilityd.Increase the supply of commodities to prevent rising prices

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3.Concerning the price elasticities of supply and demand for commodities, empirical estimates suggest that most commodities have:a.Inelastic supply schedules and inelastic demand schedulesb.Inelastic supply schedules and elastic demand schedulesc.Elastic supply schedules and inelastic demand schedulesd.Elastic supply schedules and elastic demand schedules

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4.If the demand schedule for bauxite is relatively inelastic to price changes, an increase in the supply schedule of bauxite will cause a:a.Decrease in price and a decrease in sales revenueb.Decrease in price and an increase in sales revenuec.Increase in price and a decrease in sales revenued.Increase in price and an increase in sales revenue

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5.A primary goal of international commodity agreements has been the:a.Maximization of members' revenues via export taxesb.Nationalization of corporations operating in member nationsc.Adoption of tariff protection against industrialized nation sellersd.Moderation of commodity price fluctuations when markets are unstable

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6.Which device has the International Tin Agreement utilized as a way of stabilizing tin prices?a.Multilateral contractsb.Export subsidiesc.Buffer stocksd.Export tariffs

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7.Which method has not generally been used by the international commodity agreements to stabilize commodity prices?a.Production quotas applied to the level of commodity outputb.Buffer stock arrangements among producing nationsc.Export restrictions applied to international sales of commoditiesd.Measures to nationalize foreign-owned production operations

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8.The OPEC nations during the 1970s manifested their market power by utilizing:a.Export tariffs levied for revenue purposesb.Export tariffs levied for protective purposesc.Import tariffs levied for protective purposesd.Import tariffs levied for revenue purposes

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9.One factor that has prevented the formation of cartels for producers of commodities is that:a.The demand for commodities tends to be price inelasticb.Substitute products exist for many commoditiesc.Commodity produces have been able to dominate world marketsd.Production of most commodities is capital intensive

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10.Which device has been used by the International Wheat Agreement to stipulate the minimum prices at which importers will buy stipulated quantities from producers and the maximum prices at which producers will sell stipulated quantities to importers?a.Buffer stocksb.Export controlsc.Multilateral contractsd.Production controls

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11.If the bauxite exporting countries form a cartel to boost the price of bauxite so as to increase sales revenue, they believe that the demand for bauxite:a.Is inelastic with respect to price changesb.Is elastic with respect to price changesc.Will increase in response to a price increased.Will not change in response to a price change

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12.If the supply schedule for tin is relatively inelastic to price changes, a decrease in the demand schedule for tin will cause a:a.Decrease in price and an increase in sales revenueb.Decrease in price and a decrease in sales revenuec.Increase in price and an increase in sales revenued.Increase in price and a decrease in sales revenue

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13.Which of the following could partially explain why the terms of trade of developing countries might deteriorate over time?a.Developing-country exports mainly consist of manufactured goodsb.Developing-country imports mainly consist of primary productsc.Commodity export prices are determined in highly competitive marketsd.Commodity export prices are solely determined by developing countries

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14.Which terms-of-trade concept emphasizes a nation's capacity to import?a.Income terms of tradeb.Commodity terms of tradec.Barter terms of traded.Price terms of trade

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15.Which trade strategy have developing countries used to restrict imports of manufactured goods so that the domestic market is preserved for home producers, who thus can take over markets already established in the country?a.International commodity agreementb.Export promotionc.Multilateral contractd.Import substitution

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16.Which trade strategy have developing countries used to replace commodity exports with exports such as processed primary products, semi-manufacturers, and manufacturers?a.Multilateral contractb.Buffer stockc.Export promotiond.Export quota

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17.To help developing countries expand their industrial base, some industrial countries have reduced tariffs on designated manufactured imports from developing countries below the levels applied to imports from industrial countries. This scheme is referred to as:a.Generalized system of preferencesb.Export-led growthc.International commodity agreementd.Reciprocal trade agreement

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18.Which nation accounts for the largest amount of OPEC's oil reserves and production?a.Iranb.Libyac.Iraqd.Saudi Arabia

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19.Assuming identical cost and demand curves, OPEC as a cartel will, in comparison to a competitive industry:a.Produce greater output and charge a lower priceb.Produce greater output and charge a higher pricec.Produce less output and charge a higher priced.Produce less output and charge a lower price

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20.Which of the following situations reduces the likelihood of successful operation of a cartel?a.Cartel sales experience a rapid expansionb.The demand for cartel output is price inelasticc.The number of firms in the cartel is larged.It is very difficult for new firms to enter the market

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21.Which industrialization policy used by developing countries places emphasis on the comparative advantage principle as a guide to resource allocation?a.Export promotionb.Import substitutionc.International commodity agreementsd.Multilateral contract

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22.A widely used indicator to differentiate developed countries from developing countries is:a.International trade per capitab.Real income per capitac.Unemployment per capitad.Calories per capita

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23.Concerning the hypothesis that there has occurred a long-run deterioration in the developing countries' terms of trade, empirical studies provide:a.Mixed evidence that does not substantiate the deterioration hypothesisb.Overwhelming support for the deterioration hypothesisc.Overwhelming opposition to the deterioration hypothesisd.None of the above

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24.For the oil-importing countries, the increases in oil prices in 1973-1974 and 1979-1980 resulted in all of the following except:a.Balance of trade deficitsb.Price inflationc.Constrained economic growthd.Improving terms of trade

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25.Hong Kong and South Korea are examples of developing nations that have recently pursued industrialization policies.a.Import substitutionb.Export promotionc.Commercial dumpingd.Multilateral contract

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26.Stabilizing commodity prices around long-term trends tends to benefit importers at the expense of exporters in markets characterized by:a.Demand-side disturbancesb.Supply-side disturbancesc.Demand-side and supply-side disturbancesd.None of the above

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27.Stabilizing commodity prices around long-term trends tends to benefit exporters at the expense of importers in markets characterized by:a.Demand-side disturbancesb.Supply-side disturbancesc.Demand-side and supply-side disturbancesd.None of the above

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28.To be considered a good candidate for an export cartel, a commodity should:a.Be a manufactured goodb.Be a primary productc.Have a high price elasticity of supplyd.Have a low price elasticity of demand

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29.To be considered a good candidate for an export cartel, a commodity should:a.Be a manufactured goodb.Be a primary productc.Have a low price elasticity of supplyd.Have a high price elasticity of demand

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30.To help developing nations strengthen their international competitiveness, many industrial nations have granted nonreciprocal tariff reductions to developing nations under the:a.International commodity agreements programb.Multilateral contract programc.Generalized system of preferences programd.Export-led growth program

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The diagram below illustrates the international tin market. Assume that producing and consuming countries establish an international commodity agreement under which the target price of tin is $5 per pound.

Figure 7.1. Defending the Target Price in Face of Changing Demand Conditions

31.Consider Figure 7.1. Suppose the demand for tin increases from D0 to D1. Under a buffer stock system, the buffer-stock manager could maintain the target price by:a.Selling 15 pounds of tinb.Selling 30 pounds of tinc.Buying 15 pounds of tind.Buying 30 pounds of tin

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32.Consider Figure 7.1. Suppose the demand for tin decreases from D0 to D2. Under a buffer stock system, the buffer-stock manager could maintain the target price by:a.Selling 15 pounds of tinb.Selling 30 pounds of tinc.Buying 15 pounds of tind.Buying 30 pounds of tin

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33.Consider Figure 7.1. Suppose the demand for tin decreases from D0 to D2. Under a system of export quotas, the tin producers could maintain the target price by:a.Increasing the quantity of tin supplied by 15 poundsb.Increasing the quantity of tin supplied by 30 poundsc.Decreasing the quantity of tin supplied by 15 poundsd.Decreasing the quantity of tin supplied by 30 pounds

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The diagram below illustrates the international tin market. Assume that the producing and consuming countries establish an international commodity agreement under which the target price of tin is $5 per pound.

Figure 7.2. Defending the Target Price in Face of Changing Supply Conditions

34.Consider Figure 7.2. Suppose the supply of tin increases from S0 to S1. Under a buffer stock system, the buffer-stock manager could maintain the target price by:a.Purchasing 15 pounds of tinb.Purchasing 30 pounds of tinc.Selling 15 pounds of tind.Selling 30 pounds of tin

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35.Consider Figure 7.2. Suppose the supply of tin decreases from S0 to S2. Under a buffer stock system, the buffer-stock manager could maintain the target price by:a.Purchasing 15 pounds of tinb.Purchasing 30 pounds of tinc.Selling 15 pounds of tind.Selling 30 pounds of tin

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36.Consider Figure 7.2. Assume there exists a cartel of several producers that is maximizing total profit. If one producer cheats on the cartel agreement by decreasing its price and increasing its output, rational action of the other producers is to:a.Increase their price in order to regain sacrificed profitsb.Decrease their price as wellc.Keep on selling at the agreed-upon priced.Give the product away for free

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37.A reason why it is difficult for producers to maintain a cartel is that:a.The elasticity of demand for the cartel's output decreases over timeb.Producers in the cartel have the economic incentive to cheatc.Economic profits discourage other producers from entering the industryd.Producers in the cartel have the motivation to lower price but not to raise price

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38.Once a cartel establishes its profit-maximizing price:a.Entry into the industry of new competitors will not affect the cartel's profitsb.Output changes by cartel members have no effect on the market pricec.Each cartel member is tempted to cheat on the cartel price in order to add to its profitd.All cartel members have a strong incentive to adhere to the agreed-upon price

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Figure 7.3. World Oil Market

39.Consider Figure 7.3. Under competitive conditions, the quantity of oil produced equals:a.40 barrelsb.70 barrelsc.90 barrelsd.110 barrels

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40.Consider Figure 7.3. Under competitive conditions, the price of a barrel of oil equals:a.$7b.$11c.$12d.$16

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41.Consider Figure 7.3. Under competitive conditions, producer profits total:a.$0b.$140c.$200d.$280

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42.Consider Figure 7.3. Under a profit-maximizing cartel, the quantity of oil produced equals:a.40 barrelsb.70 barrelsc.90 barrelsd.110 barrels

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43.Consider Figure 7.3. Under a profit-maximizing cartel, the price of a barrel of oil equals:a.$7b.$11c.$16d.$19

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44.Consider Figure 7.3. Under a profit-maximizing cartel, producers realize:a.Profits totaling $280b.Profits totaling $360c.Losses totaling $140d.Losses totaling $180

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45.Import substitution policies make use of:a.Tariffs that discourage goods from entering a countryb.Quotas applied to goods that are shipped abroadc.Production subsidies granted to industries with comparative advantagesd.Tax breaks granted to industries with comparative advantages

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46.Export-led growth tends to:a.Exploit domestic comparative advantagesb.Discourage competition in the global economyc.Lead to unemployment among domestic workersd.Help firms benefit from diseconomies of large-scale production

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47.All of the following nations except ____ have recently utilized export-led (outward oriented) growth policies.a.Hong Kongb.South Koreac.Argentinad.Singapore

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48.The characteristics that have underlaid the economic success of the "high-performing Asian Economies" have included all of the following except:a.High rates of domestic investmentb.Diseconomies of scale occurring at low output levelsc.Large endowments of human capitald.High levels of labor productivity

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49.The development of countries like South Korea and Singapore has been underlaid by all of the following except:a.High domestic interest ratesb.R&D and product innovationc.Education and on-the-job trainingd.High levels of saving and investment

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50.For most developing countries:a.Productivity is high among domestic workersb.Population-growth and illiteracy rates are lowc.Saving and investment levels are highd.Agricultural goods and raw materials constitute much of domestic output

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51.East Asian economies have performed well bya.Obtaining foreign technologyb.Remaining open to international tradec.Investing in their peopled.All of the above

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52.East Asian economies started enacting export-push strategiesa.By late 1950s and 1960sb.Immediately after World War IIc.In the late 1980sd.In the early 2000s

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53.Prior to the formation of the Organization of Petroleum Exporting Countries, individual oil producing nations,a.Operated like sellers in a competitive marketb.Behaved like individual sellers in a monopoly marketc.Had considerable control over the price of oild.Both b and c.

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54.A key factor underlying the instability of primary product prices and export receipts of developing nations is thea.Low price elasticity of the demand of primary productsb.High price elasticity of supply of primary productsc.High price elasticity of demand of primary productsd.None of the above

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TRUE/FALSE

1.The developing nations are most of those in Africa, Asia, North America, and Western Europe.

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2.Most developing-nation exports go to industrial nations while most developing-nation imports originate in industrial nations.

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3.The majority of developing-nation exports are primary products such as agricultural goods and raw materials; of the manufactured goods exported by developing nations, most are labor-intensive goods.

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4.Developing nations overwhelmingly acknowledge that they have benefited from international trade according to the principle of comparative advantage.

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5.Among the economic problems facing developing countries have been low dependence on primary-product exports, unstable export markets, and worsening terms of trade.

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6.For developing countries, a key factor underlying the instability of primary-product prices and export receipts is the high price elasticity of demand for products such as tin and copper.

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7.Empirical research indicates that the demand and supply schedules for most primary products are relatively inelastic to changes in price.

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8.If the demand for coffee is price inelastic, an increase in the supply of coffee leads to falling prices and rising sales revenues.

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9.Not only do changes in demand induce relatively wide fluctuations in price when supply is inelastic, but changes in supply induce relatively wide fluctuations in price when demand is inelastic.

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10.Developing countries have complained that because their commodity terms of trade has deteriorated in recent decades, they should receive preferential tariff treatment from industrialized countries.

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11.To promote stability in commodity markets, International Commodity Agreements have utilized production and export controls, buffer stocks, and multilateral contracts.

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12.During periods of falling demand for coffee, an International Commodity Agreement could offset downward pressure on price by implementing policies to increase the supply of coffee.

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13.To prevent the market price of tin from rising above the target price, the manager of a buffer stock will purchase excess supplies of tin from the market.

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14.To prevent the market price of tin from falling below the target price, the manager of a buffer stock would purchase any excess supply of tin that exists at the target price.

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15.Prolonged defense of a price ceiling tends to increase the supply of a commodity held by a buffer stock manager, thus putting downward pressure on price.

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16.Rather than conduct massive stabilization operations, buffer stock officials will periodically revise target prices should they move out of line with long-term price trends.

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17.A multilateral contract stipulates the maximum price at which importing nations will purchase guaranteed quantities from producing nations and the minimum price at which producing nations will sell guaranteed amounts to importing nations.

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18.It is widely agreed that import-substitution policies have been a main contributor to above-average growth rates in developing countries.

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19.Under the Generalized System of Preferences program, the major industrial countries agree to temporarily reduce tariffs on designated imports from other industrial countries.

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20.The "newly industrializing countries" of East Asia have emphasized the implementation of import-substitution policies to insulate their industries from international competition.

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21.In recent decades, the East Asian "newly industrializing countries" have pursued export-led growth (outward orientation) as an industrialization strategy.

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22.The purpose of a cartel is to support prices higher than would occur under more competitive conditions, thus increasing the profits of cartel members.

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23.A cartel tends to be most successful in maximizing the profits of its members when there are a large number of producers in the cartel and these producers' cost and demand conditions greatly differ from each other.

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24.When cartel members agree to restrict output to increase the price of their product, a single member of the cartel has an economic incentive to violate the agreement by increasing its output so as to increase profits.

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25.Developing countries have often felt that it is easier to protect their manufacturers, via import-substitution policies, against foreign competitors than to force industrial nations to reduce trade restrictions on products exported by developing countries.

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26.Import-substitution policies are supported by the fact that many developing countries have small domestic markets and thus their producers enjoy the benefits of diseconomies of small-scale production.

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27.Export-led growth industrialization suffers a major problem: it depends on the willingness and ability of foreign nations to absorb the goods exported by the country pursuing such a policy.

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28.The so-called Four Tigers include Australia, South Korea, Taiwan, and Hong Kong.

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29.By the 1990s, China had departed from a capitalistic economy and shifted to a Soviet-type economy encompassing small-scale, labor-intensive industry.

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30.During the late 1980s and early 1990s, China dismantled much of its centrally-planned economy and permitted free enterprise to replace it.

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31.In its transition toward capitalism, by the 1990s China permitted free enterprise as well as democracy for its people.

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32.Most of China's manufactured exports have constituted labor-intensive goods.

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33.In 1999 the United States revoked the normal-trade-relations (most-favored-nation) status it provided China in retaliation for China's suppression of human rights.

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34.A multilateral contract specifies the maximum price at which exporting countries agree to sell a product and the minimum price at which importing countries agree to buy a product.

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35.As a profit-maximizing cartel, the Organization of Petroleum Exporting Countries would produce a greater output and charge a lower price than what would occur in a competitive market.

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36.The success of buffer stocks is limited by the fact that stockpiles of a product may be exhausted after prolonged sales, while funds may be exhausted after prolonged purchases.

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37.The United Nation Conference on Trade and Development in 1964 was successful in convincing developing countries to switch from export-led industrialization to import-substitution industrialization.

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38.Under the Generalized System of Preferences program, the industrialized countries agree to maintain lower tariffs on imports of natural resources and higher tariffs on imports of manufactured goods.

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39.The replacement of imports of one nation with imports of another nation is known as "import substitution."

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40.During periods of weak demand, the Organization of Petroleum Countries has implemented production (export) quotas to ensure that excess oil supplies be kept off the market.

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SHORT ANSWER

1.What are some major trade problems faced by developing nations?

ANS:Trade problems include lack of diversification of economies, unstable export markets, declining terms of trade over time, and lack of access to markets of advanced countries.

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2.Are economic downturns helpful to cartels?

ANS:No they are generally problematic for cartels. As market sales dwindle in a weakening economy, profits fall. Cartel members may conclude that they can escape serious decreases in profits by reducing prices, in expectation of gaining sales at the expense of other cartel members.

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ESSAY

1.What are some of the growth strategies that have been employed by the developing nations? How successful are these strategies?

ANS:Besides attempting to stabilize commodity prices, developing nations have promoted internal industrialization through policies of import substitution and export promotion. Countries emphasizing export promotion have tended to realize higher rates of economic growth than countries emphasizing import-substitution policies.

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2.Describe the flying-geese pattern of economic growth? What countries have pursued this strategy?

ANS:It is widely recognized that East Asian economies have followed the flying-geese pattern of growth. This pattern of growth occurs when countries gradually move up in technological development by following in the pattern of countries ahead of them in the development process. For example, Malaysia and Taiwan take over leadership in apparel and textiles from Japan as Japan moves into higher-technology sectors of automotive and electronic products.

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